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Question:

1. Select ONE Australian company invoived in a corporate scandal or collapse.
2. Identify the parties concerned and the issues in the case/investigation.
3. Explain the facts of the case/investigation and explain the background of the issues.
4. Idendify important issues for the assignment?
5. Identify the law and legal issues regarding the collapse.
6. How was Investigation conducted in this corporate collapse.
7. Whats were the COURT findings.
8. Whats was Asic's findings (If applicable).
9. Was Corporations law successfully able to find the corporate entity or persons liable.
10. Whats measures can be identified to reduce the risk of future corporate entity or persons liable

 

 

Answer:

Introduction

With the increase in tough competition within the market, the tendency of using unscrupulous and unethical ways of the people regarding making personal profits and benefits have increased to a huge extent. As a result, this has taken up a new shape thereby hampering the organizations to a huge extent and even leading to corporate collapse or scam (Christensen et al. 2010). Corporate collapse or scandal refers to a major liquidation or bankruptcy of a business due to the involvement of some unethical behavior and conduct of the people working within the company or on the behalf of it. It sometimes involves fraud of accounting and money that leads to the termination of the existence of the organization. It is not an all of a sudden event, rather is a gradual process where the signs of the company getting terminated develop over years (Mire, 2013).

In this assignment, collapse of an Australian well renounced company named Centro Retail and Property Trust Group (Centro Group) will be discussed taking into account the causes of this major collapse. In addition to this, the facts that are investigated and analyzed on the basis this case, laws and issues and methods pertaining to the investigation are also discussed along with Court findings and ASIC findings (Gibbons and D' Andrea, 2011). 

 

1) Corporate collapse of Centro Retail and Property Trust Group (Centro Group)

In the recent years of modern industrialization, the corporate society of Australia has witnessed a pretty large number of scams and failures of the large corporate bodies. The Centro Properties Group is an Australian Real Estate Investment Trust company that is specialized in having ownerships as well as management of the shopping centers of Australia. The company has its headquarters in Melbourne, Australia and having offices in many parts of Australia. The collapse and the failure of this company when came into the limelight in 2007-2008 sent shockwaves all over the Australian business community (Carnegie and O’Connell, 2014). The case was investigated and analyzed thereafter and a handful of management personnel were convicted and imprisoned on the charge of not discharging their duties and responsibilities properly that lead to the downfall of the company (Psaros, 2008).

2) Parties concerned and issues regarding the case/ investigation

After the downfall of the company, a thorough investigation was done in order to find out the personnel’s involved that lead to the downfall of the company. A thorough investigation is done to find out the roles of the auditors, directors and higher authorities that were associated with the downfall and collapse of Centro Group (Kolb, 2010). Eight directors of Centro were found guilty for breaching their duties that lead the company in facing a huge financial loss. According to the results of the investigation, it was found out that the chairman of Centro group, Brian Healey and director Scott were found guilty in breaching their duties as they were unable to disclose the amount of the short term debt of nearly $3 billion in the annual financial report of 2007. The directors need to have stayed more alerted and could have made some relevant enquires regarding the understated financial statements (Alderman et al. 2012).

The other higher officials such as Sam Cooper, Mr. Scott, Coles Myre, Jim Hall and Mr. Nenna had to give penalty due to not utilizing their powers and experience in understanding the financial situation of the company. Some of them were either disqualified from the position of the director or were penalized and others were declared contravened with no penalty (Malinovskii, 2014). These higher officials were charged for neglecting and failing to take the responsibility and strong steps for the wrong financial statements. The fall of Centro Group had a bad affect on the employees, shareholders, creditors and other associated with this company.

 

3) Facts of the case/ investigation and background of the issues

The case of the scam of Centro Group has been investigated and facts regarding the scam have come into limelight. According to Stojkovic (2013) the errors in the accounts of Centro Group and the negligence of the directors in signing off the misstated financial statements was the major reason that lead to a major collapse or scam of the Centro Group. It was found out that the directors of Centro Group breached their responsibilities and duties while performing as directors under the Corporation Act 2001. The directors failed to read as well as understand the accounting and financial statements of the company and didn’t apply any kind of knowledge and experience in reviewing the financial statements. They totally relied on the audit committee members and didn’t bother to go through the financial reports and didn’t exercise their powers for further investigation on knowing the financial position of the company. It was also investigated and found out that there were several errors in the accounts especially in the interest bearing liabilities which were shown in the accounting statement as liabilities having non-current bearing of any interest (Gibbons and D' Andrea, 2011).

In addition to this, the case was further investigated for finding out the further facts and issues related to the case study. It was found out that 8 of the directors consisting of the CEO, CFO and seven other non executive directors were found guilty regarding the case of Centro Group (Wyburn, 2010). The case evolved due to the irresponsible attitudes of the directors in relation to false financial reporting. The failures also happened due to disclosure of certain guarantees that entered after the balance date.

4) Important issues for the assignment

This assignment deals with the investigation and analysis of the collapse of Centro Group. The important issues of this assignment are finding out the reasons that lead to the collapse of Centro Group. In addition to this, the ASIC’s findings and Court findings will be further discussed regarding their investigations and verdict for this case (Mire, 2013). The failure of reviewing the financial statements by the directors and executives of the company lead to the collapse of the company. The issue arises due to the negligence and misusing the power of the directors and executives for investigating the financial position of the company.

 

5) Laws and legal issues regarding the corporate collapse

The Centro Group collapsed due to failure since the directors failed to understand their powers in understanding the errors that were present in the accounting statements of the company. According to the law, each of the directors should have the acknowledgement about the current liabilities that bears interest as well as of the guarantees (Christensen et al. 2010). They also should be aware of the accounting principles that could have alerted the directors of the apparent error that as in the financial statements. They could have enquired and investigated the errors in the financial statements which they failed to do.

This shows that not only they breached the laws of Corporation Act 2001, but also didn’t utilize their powers and rights properly. According to section 344 of the Corporations Act 2001, the directors need to take the steps for securing the compliances with the obligations regarding the financial reporting. In addition, according to section 180(1), the directors of the company need to act with diligence and care in handling the financial statement of the company (Eyers, 2011).

6) Method followed in the investigation conducted in this corporate collapse

After the collapse of Centro Group, the case was properly investigated and analyzed before drawing conclusions from it. ASIC was appointed for further investigating the causes of the corporate collapse of Centro Group. The time, place, space and the characters involved for the collapse and downfall of the company are identified. Data and information were collected from these personnel and situation that helped in the time of investigation. The directors and executives were questioned against their negligence they showed while signing off the financial statements while reviewing it thoroughly (Psaros, 2008). The directors though had higher degrees in financial literacy failed to use their expertise and knowledge in understanding the errors in the financial statements. The directors were found guilty of staying unaware of the company’s financial position and totally relying on the audit committee of the company while signing off the error filled financial statement of the company.

7) COURT Findings

The judgment of Justice Middleton included the following explanation, findings as well as conclusions regarding this case of Centro Collapse Group. According to the judgment of the court the directors of the company are all intelligent, consistent as well as experienced who were honest throughout and didn’t adopt any unethical ways that lead to the downfall of the company (Wyburn, 2010). The directors were only aware of the liabilities that are bearing the current interest but if they were aware of the accounting principles, they could have become more alerted to the error in the financial statements. The directors at that time could have made necessary enquires to the management board, audit committee members and other directors which they failed in adopting the reasonable steps.

In addition to this, the information that was not disclosed in the financial statements on the statues of the liabilities was important for assessing the risks. According to the Court findings, this important matter was either not known to the directors or if known, they could have analyzed it. The directors if had understood the significance of their duties and had read and used their brains in the financial statements, they could have questioned about the things that are not clearly mentioned in the financial statements. On the basis of the court findings, the directors didn’t exercise their responsibility according to section 295 (4) to see whether the financial statements are consistent or not for judging the financial position of the company (Stojkovic, 2013). It is the responsibility of the directors to call up the auditors and accountants for further enquiry of any matter relevant to the financial statements which the directors failed to do.

8) ASIC’s findings

ASIC is Australian Securities and Investments Commission that was given responsibility for investigating and analyzing the case of collapse of Centro Group. The major role played by ASIC was to exercise its powers for nailing down the directors of Centro Group for not carrying out their legal duties and responsibilities properly. According to the ASIC’s findings, the entire board of Centro Properties Group has breached their duties on approving the accounts that gave a false statement about the short term liabilities. It was a major finding of ASIC that there was an error of nearly $1.1 billion that arose due to misinterpretation of the short term debt. This resulted in suing of the former chief executive, Andrew Scoot, former chairman of Centro Group, Brian Healey and Paul Cooper, the current chairperson of the group by ASIC (Eyers, 2011).

In addition to this, the other members such as Sam Kavourakis, former head of auditing committee, Jim Hall, the non current executive director and Peter Wilkinson and Graham Goldie who were also the former non executive directors were sued by ASIC for the collapse of Centro Group. Moreover, Romano Nenna who was the former finance director of Centro Group accepted some of the allegations that ASIC has charged on him. It was found out by ASIC that the accounts of 2006 – 2007 didn’t disclose anything about the US dollar liabilities amounted nearly $1.75 billion that was guaranteed by Centro Group for an US based company. In addition to this, it was also found out that in late 2007, when the company was facing hardships in refinancing the bank debts, the prices of the shares of the company plunged. And in early 2008, the company revealed the fact that it had understated the short term liabilities of the company that amounted nearly $3 billion. On the basis of the findings of ASIC, the directors of Centro Group failed to maintain the standard of care that was expected from the participants of the boardroom (Alderman et al. 2012). 

 

9) Success of the Corporations’ Law in finding the corporate entity or persons liable

After a thorough investigation regarding the collapse of the Centro Group, it was found out by the Federal Court that the executives and directors of Centro Group had broken the Corporations Act. The directors and executives of the Centro Group had signed off the financial reports that were unsuccessful in disclosing billion of dollars of the short term debts. The board members of Centro didn’t take any fruitful steps and were not careful for carrying out their duties efficiently and effectively under the Corporations Act 2001 and thereby made mistake in approving the misstated fiscal reports of the company during 2007 (Carnegie and O’Connell, 2014). It was commented in the court that the board members as well the audit committee members of the company were sleeping at the wheels and the court need to take decisions that will have hard consequences against the board members and executives.

The corporate entities were highly financially educated and Scoot and Coles Myer had extensive experience in debt structuring ad property structuring. The other board members such as Sam Kavourakis, Jim hall, Paul cooper were holding the most prestigious positions in the company and had enough experience in the financial business. Still, the company was collapsed due to their negligence in overlooking the misstated financial statements (Mire, 2013). In spite of having enough knowledge in the financial world, the directors were totally relying on the advice that their well experienced and well paid auditors were giving them regarding the financial position of the company. The directors could have used their experience and knowledge for further investigating the financial situation of the company. From this, it is seen clearly that the Corporations laws were breached at every step which lead to the corporate collapse of Centro Group.

10) Recommendations regarding the reduction of future corporate collapse

In future in order to prevent these kinds of corporate collapses, certain recommendations can be made for it. The directors and the executives of the companies need to be alert rather than totally relying on the audit committees and their financial statements. Since the executives and higher official are much more financially educated and experience they need to exercise their powers in cross checking the financial statements of the company related to the financial position. In addition to this, the directors and executives must use their power for further investigating the financial statements of the company. Moreover they also need to be careful in signing off the financial reports after going through it vividly scrutinizing every point in it.

Conclusion

This assignment has discussed about the facts and findings that dealt with the corporate collapse of Centro Group. The executives and directors were found guilty for not exercising their powers in a right way and were also found careless in signing off the financial statements without going through it properly. In addition to this, the procedure that was followed in this investigation is discussed along with ASIC findings and the Court findings regarding the Centro Group collapse. The effectiveness of Corporation Laws was also elaborately discussed regarding the violations of it by the corporate entities. Some possible recommendations are also discussed at the end of assignment for preventing or avoiding such kind of collapses.

 

Reference

Books

Kolb, R. (2010) Lessons from the financial crisis, Hoboken, N.J.: Wiley

Psaros, J. (2008) Australian corporate governance, Frenchs Forest, N.S.W.: Pearson Education

Journals

Carnegie, G. and O’Connell, B. (2014) “A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s”, Critical Perspectives on Accounting, 25(6), pp.446-468

Christensen, J., Kent, P. and Stewart, J. (2010) “Corporate Governance and Company Performance in Australia”, Australian Accounting Review, 20(4), pp.372-386

Malinovskii, V. (2014) “Annual intrinsic value of a company in a competitive insurance market”, Insurance: Mathematics and Economics, 55, pp.310-318

Mire, S. (2013) “Australia: Ethics and Corporate Litigation—Considering Bell Group”, Legal Ethics, 16(2), pp.370-372

Stojkovic, L. (2013) “Legal aspects of risk management and internal control system as integral part of corporate governance at insurance company”, Evropska revija za pravo osiguranja, 12(3), pp.46-53

Wyburn, M. (2010) “Pooling as a response to the competing interests in corporate group collapse in Australia”, Int. Insolv. Rev., 19(1), pp.65-97

Websites

Alderman, P., Pickthall, E. and Chapman, L. (2012) The Centro experience – twelve months later, Lexology.com, Available at: https://www.lexology.com/library/detail.aspx?g=175d0ca8-c50e-4dc4-bd8b-3eaef8830f2f [Accessed 18th Jan. 2015]

Eyers, J. (2011) How ASIC nailed the Centro board, Financial Review, Available at: https://www.afr.com/p/markets/dealbook/how_asic_nailed_the_centro_board_mDAWIQQkJiIJlerHaLIKwJ [Accessed 18th Jan. 2015]

Gibbons, P. and D' Andrea, J. (2011) Centro Case: A warning for all company directors and their advisors, Available at: https://www.aubreypaton.com.au/pages/Info/Centro-Case.pdf [Accessed 18th Jan. 2015]

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